In Australia, the RBA minutes from the rate policy meeting revealed concern about inflation and the potential need for higher interest rates despite an elevated Aussie value if “current conditions persist”.

In Japan, the BOJ chief said that the economy is in a “very severe state” which has given the market reason to suspect that further monetary easing may be forthcoming, perhaps as early as the end of this week.

So there is a bit of risk appetite in the markets, with Yen weakness driving stocks and commodities slightly higher, though those are giving back early gains. New home starts and building permits here in the US may be the decider.

In the forex market:

Aussie (AUD): The Aussie is mostly higher though giving back some gains after the release of the RBA rate policy meeting minutes showed a need for potential higher rates if inflation persisted. Consumer confidence figures are due out tomorrow.

Kiwi (NZD): The Kiwi is mixed, benefiting from a lower Yen but also seeing gains pared as more risk aversion creeps into the market. Tonight will be the release of PPI input and output data, which could be a harbinger of inflation.

Loonie (CAD): The Loonie started the morning higher but is giving back gains as oil prices have retreated further now trading closer to 96.50 than 97 and change earlier. Thursday will bring the review release from the Bank of Canada, and Friday’s CPI data and retail sales figures will show whether or not the BOC is any closer to rate hikes.

Euro (EUR): Economic sentiment figures are mostly lower as EU meeting of finance ministers tries to get back on track after the shocking arrest of the head of the IMF. ECB policy-makers are set to speak this week on the state of the Euro zone’s economy, and the debt crisis is still very much a problem.

Pound (GBP): The Pound is mostly higher after the CPI data release which showed very hot inflation, and the UK may be the first domino to fall into stagflation (besides Japan of course) as the global economy slows down. The BOE minutes tomorrow will show whether or not they will attempt to fight inflation through a change of policy, or will be content to allow the situation to worsen. (Click chart to enlarge)

Dollar (USD): The Dollar is gaining strength as the morning progresses as the mild risk appetite in the market is being replaced by risk aversion. This is because housing starts figures came in way worse than expected, showing a decline of 10.6% vs. an expectation of a gain of 3.6%. New starts were 523K vs. 569K. In addition, building permits were down 4%, vs. an expected gain of .9%. This highlights what the true problem is here in the US—declining asset prices.

Yen (JPY): The Yen is weaker across the board as the head of the BOJ stated that the Japanese economy is in trouble and hinting that further monetary easing may be forthcoming. Friday’s rate decision could be a time that further easing is announced. (Click chart to enlarge)

Just throw the old economic handbooks away and take a look at what is going on in the global economy today. It is a complete government failure by policy-makers around the globe that is making the economic situation worse and not better.

Today’s housing starts figures highlight the problem—biflation whereby commodities prices rise and asset values fall. Rather than attempting to help the common man by keeping commodity price inflation in check, Central bankers and policy-makers prefer to protect the banks who by all accounts are about to see another wave of defaults come in if the demand for home continues to fall along with prices.

Would you buy a declining asset right now? In the face of higher food and energy costs? With an uncertain economy that is not creating jobs? What happens when more people lose their jobs and then can’t afford to buy stuff, creating another wave of losses as businesses pare back to service the now-lower demand?

Inflation? Stagflation? Biflation? What type of “flation” is it? Well it doesn’t matter what you call it—just know that it is being fostered by bad government policy and weak-willed politicians unwilling to face the hard truths. Not to mention fat-cat bankers who will still take big bonuses and try to pay dividends, ahead of the next impending leg down in housing.

We’re in an unfortunate situation folks, and rest assured that your pain won’t be felt by the powers that be. It’s really easy to make policy when it doesn’t apply to you and the damage that’s created will be left for someone else to clean up.

All we can do is attempt to make sense of it all, and put our money where it will earn the most. For me, that’s the forex market!

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